Review
Western University
A perfectly competitive market consists of firms that produce identical products that sell at the same price
Each firm’s volume of output is so small in comparison to the overall market demand that no single firm has an impact on the market price
The first characteristic implies that sellers and buyers act as price-takers
The second and third characteristics imply a law of one price
The fourth characteristic implies that the industry is characterized by free entry
\[ \begin{align} \max_{Q} \pi(Q)&=TR(Q)-TC(Q) \\ \text{s.t. } Q&\ge0 \end{align} \qquad(1)\]
Economic Profit = Sales Revenue - Economic (Opportunity) Cost
firm sells output Q; TR(Q), revenue from selling the quantity; TC(Q), economic cost of producing the quantity Q
\[ \frac{dTR(Q)}{dQ}= \frac{dTC(Q)}{dQ} \]
Output quantities: \(TR(Q)=PQ\) and \(TC(Q)\)
Input quantities: \(TR(K,L)=Pf(K,L)\) and \(TC(K,L)=rK+wL\)
\(\frac{dTC(Q)}{Q}\) should be increasing
\(\frac{df(\bar K,L)}{dL}\) should be decreasing
P=SMC, where SMC slopes upward as long as P > Ps
0 where P < Ps
Productivity
Carbon tax